Question 1

A stock dividend will cause changes in the dollar value of which of the below capital accounts?

Accepted Answer

A stock dividend redistributes a portion of a company's retained earnings to its common stock and, depending on the size of the dividend, may also involve an increase in additional paid-in capital, thus affecting all the mentioned capital accounts.

Question 2

Which of the following motivates corporations to split their common stock?

Accepted Answer

Corporations split their common stock to keep the price of the firm's common stock within an optimum price range. A stock split increases the number of outstanding shares and decreases the price per share, making it more affordable for investors to purchase. This increased affordability can increase demand for the stock and ultimately drive up the price, keeping the stock price within an optimal range. The other options listed, increasing retained earnings, reallocating capital to shareholders, and narrowing ownership of the firm, are not typically motivations for a stock split.

Question 3

Use the following information to answer the following question(s).
Your firm is planning to pay a 15% stock dividend.The market price for the stock has been $84.The table below presents the equity portion of your firm's balance sheet before the dividend.
Common stock
Par value
(1 million shares
outstanding;$4 par value)$ 4,000,000
Paid-in capital 16,000,000
Retained earnings 30,000,000
Total equity $50,000,000
-Which of the following would result from payment of the stock dividend?

Accepted Answer

Paying a stock dividend redistributes the company's equity; it does not change the total amount of shareholders' equity. It reallocates part of the retained earnings to common stock, but the total equity remains the same.

Question 4

The ________ designates the date on which the stock transfer books are closed in regard to a dividend payment.

Accepted Answer

The date of record designates the date on which the stock transfer books are closed in regard to a dividend payment. This means that only those shareholders who are on record on this date will receive the dividend, even if they sell their shares before the payment date. The declaration date is when a company's board of directors announces that a dividend will be paid, the ex-dividend date is the date on which the seller, rather than the buyer, of a stock will be entitled to a recently announced dividend, and the payment date is the date on which a dividend is actually paid to eligible shareholders.

Question 5

The final approval of a dividend payment comes from the

Accepted Answer

The board of directors of a company is responsible for making major company decisions, including the approval of dividend payments.

Question 6

A stock split will cause changes in the dollar value of which of the following?

Accepted Answer

A stock split does not affect the par value of the stock or the book value of common equity. It does, however, affect the per share price of the stock by reducing it and increasing the number of shares outstanding, thereby affecting the market value of common equity.

Question 7

Five years ago,Mr.Martinez purchased 1000 shares of JPM stock at $50 per share.If Mr.Martinez ' tax rate is 25%,would he prefer that the company pay a $5.00 per share dividend or offer to repurchase 100 shares at $50 per share?

Accepted Answer

If the company pays a $5.00 per share dividend, Mr. Martinez would owe taxes on the dividend income at his tax rate of 25%. Therefore, he would receive $4.25 per share after taxes ($5.00 - ($5.00 x 0.25) = $3.75; $5.00 - $3.75 = $1.25; $5.00 - $1.25 = $3.75). If the company offers to repurchase 100 shares at $50 per share, Mr. Martinez would receive $5,000, and he would not owe any taxes on the sale because he is not realizing a capital gain. Therefore, repurchasing the stock is the better option for Mr. Martinez.

Question 8

If a firm's EPS are $8.33,and the firm is paying a dividend of $1.25 per share,what is the firm's dividend payout ratio?

Accepted Answer

Dividend payout ratio is the proportion of earnings paid out as dividends to shareholders. Dividend payout ratio = (Dividends per share / Earnings per share) x 100. Substituting the given values, we get (1.25/8.33) x 100 = 15%. Therefore, the answer is option C, 15%.

Question 9

Trendy Corp.recently declared a 10% stock dividend.As of the date of the announcement,Trendy had 10 million shares outstanding which were selling on the NYSE for $50 per share.An accounting entry is required on the balance sheet in order to transfer an amount from retained earnings to the common stock and additional paid-in capital accounts.What is the dollar amount of retained earnings that will be transferred from retained earnings to the common stock account as the result of the stock dividend? Assume that the par value of Trendy is $2 per share.

Accepted Answer

The answer of Trendy Corp.recently declared a 10% stock dividend.As...

Question 10

Assume that Home Depot's annual dividend is $1.60 per share.This dividend would most likely be paid as

Accepted Answer

Most companies, including Home Depot, typically pay dividends quarterly, so an annual dividend of $1.60 would likely be paid as $0.40 four times per year.

Question 11

In response to a temporary decline in earnings per share,most companies would

Accepted Answer

Decreasing or suspending the cash dividend could lead to a decrease in investor confidence, which could ultimately harm the company's stock price. Substituting a stock dividend for a cash dividend may not be feasible or desirable for all shareholders. Therefore, most companies would choose not to decrease their cash dividend.

Question 12

ZZZ Corporation has declared a stock dividend that pays one share of stock for every 10 shares owned.What will happen to EPS immediately upon the distribution of the stock dividend?

Accepted Answer

EPS will decrease because the number of shares outstanding increases, while net income remains the same, leading to a lower EPS.

Question 13

Assume that on January 1 a firm announces that on June 30 they will pay a dividend of $2.50 per share to holders of record on March 30.When does the stock sell ex-dividend?

Accepted Answer

The stock sells ex-dividend two business days prior to the record date, which is March 30 in this case. So the ex-dividend date would be March 28. Choice A (January 5) is too early, Choice B (April 5) is after the record date, Choice D (July 5) is after the dividend has already been paid, and Choice E (June 25) is too close to the dividend payment date.

Question 14

The only definite result from a stock dividend or a stock split is

Accepted Answer

The only definite result from a stock dividend or a stock split is an increase in the number of shares outstanding. This means that the total value of the company remains the same, but the value per share decreases (in the case of a stock dividend) or the number of shares increases (in the case of a stock split). There is no guaranteed increase in the P/E ratio or the common stock's market value, as these factors depend on various other external and internal factors affecting the company.

Question 15

The ex-dividend date is ________ the holder of record date.

Accepted Answer

The ex-dividend date is typically two days before the holder of record date. This means that you must purchase the stock at least two days before the holder of record date in order to receive the dividend.

Question 16

Which of the following describes the effect of a stock dividend?

Accepted Answer

A stock dividend increases the number of shares outstanding without affecting the total value of the company. This means that each shareholder now owns a smaller percentage of the company, but the value of their shares does not change. The market price of the stock may fluctuate based on supply and demand, but a stock dividend does not guarantee an immediate increase in price. A stock dividend also does not affect the paid-in capital account, as it has no impact on the initial investment made by shareholders. A stock dividend does not necessarily indicate that the company is short on cash, as there may be other reasons for issuing a stock dividend such as improving liquidity or increasing the attractiveness of the stock to potential investors.

Question 17

Which of the following is the most likely reason for a corporation to cut its dividend?

Accepted Answer

A corporation may cut its dividend if it believes that the existing dividend levels are no longer sustainable, either due to a decline in earnings or a need to invest more in the business. Cutting the dividend can help the firm conserve cash and avoid borrowing to pay out dividends.

Question 18

For accounting purposes,a stock split has been defined as a stock dividend exceeding

Accepted Answer

According to accounting standards, a stock split is defined as a distribution of additional shares of stock in a company to existing shareholders. A stock split can be in the form of a stock dividend, which is often used to increase the number of shares outstanding in a company. A stock dividend that exceeds 25% is generally considered to be a stock split for accounting purposes. This means that if a company issues additional shares in excess of 25% of the outstanding shares, it must be accounted for as a stock split.

Question 19

Most stock splits

Accepted Answer

Stock splits increase the number of outstanding shares without changing the overall value of the company, so choice B is incorrect. Additionally, stock splits typically result in a decrease in the stock price per share, not an increase, so choice C is also incorrect. Therefore, only choice A is correct as it is the most accurate statement about what stock splits do.

Question 20

If instead of a stock dividend,your firm decided to split the stock 2-1,then the number of shares outstanding and their par value per share would be

Accepted Answer

If the stock is split 2-1, then for every one share owned, the holder will now have two shares. This means the number of shares outstanding will double from 1 million to 2 million. However, the par value per share will decrease by half from $4 to $2. Therefore, the correct choice is C, 2 million shares at $2 par value per share.

Quiz 16: Dividend Policy